David Prosser: The end of commission is just a new beginning for Hargreaves Lansdown

 

Outlook Stock market investors really are a fickle bunch. Just a few weeks back, the Financial Services Authority's unveiling of a new regulatorypolicy on commission payments saw more than a quarter of Hargreaves Lansdown's value disappear during a single session. Yesterday, after the financial adviser and stockbroker announced better-than-expected trading figures, half those losses were made good in the space of a couple of hours.

Peter Hargreaves, one of theco-founders of Hargreaves Lansdown – and a man renowned for his forthright opinions – describes the FSA's position as "silly".

The regulator wants to stop fund managers paying commissions to online platforms such as Hargreaves Lansdown's verypopular service Vantage when investors use it to buy their products. Given that the whole point of the retail distribution review (RDR), the reform in question, is to drive sales commissions out of the business of financial advice and product distribution, "silly" doesn't seem quite the right word. That is not to say, however, that the sell-off of Hargreaves Lansdown last month was justified.

The irony is that the company rose to prominence courtesy of its discount broking service, which saw it rebate fund managers' commissions to investors who used it simply as an intermediary through which to invest, rather than as a financial adviser. It ought to be the last business in the financial services sector to be worrying about a long-overdue crackdown on commissions.

Still, as the platform market leader by quite some distance, Hargreaves earns a decent income from the current system. It is effectively a bundling arrangement, where a Vantage investor pays a single fee to his fund manager of choice, which then hands some of that money over to Hargreaves Lansdown to cover the costs of the platform and any financial advice dispensed.

At first sight then, silly or not, the FSA's proposals, which amount to a compulsory unbundling of those fees, represent a threat. But it may not be as serious as one would imagine. Hargreaves Lansdown already charges Vantage investors a fee for certain types of asset purchase – buying shares, for example – and can switch to this model for fund investments too if necessary. And since the FSA's proposals apply across the board – both to rival platforms and to other types of intermediary – clients won't be able to avoid such charges by going elsewhere.

Bear in mind, too, that the FSA's proposals are not a done deal. RDR is not due to come into effect until the beginning of 2013 and we may not yet have heard its final word. Not least because while the model it proposes might be true to the ambition of driving out commission, there is good reason to think that unbundling fees for fund management, transaction costs and financial advice may result in investors paying more.

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